Japan's Doing Better Than You Think
Commentators, particularly but not exclusively from the west, seem to delight in bemoaning the alleged weakness of the Japanese economy and that nation's "lost decade."
Japan itself is considerably concerned. On Monday, the Financial Times, which in particular seems to relish finding countries worse off than its own, quoted Japan’s economy minister, Kaoru Yosano, as saying the economy is unlikely to respond to a planned fiscal stimulus and adding that the country would have to endure higher unemployment and possibly a return to deflation and shrinking output..
Thus the Financial Times is now predicting another “lost decade” for a “lost and lonely country” dominated by “grey-sky thinking”. By the same token, avoidance of the Japan experience with deflation is often given as a reason for the United Statesm the United Kingdom and the Eurozone as a whole (trying to drag Germany with it) to justify almost any level of bailout-outs and fiscal stimulus to revive their economies
But it seems too difficult sometimes for these commentators to look at the basic statistics, let alone analyze why conditions in the west today are fundamentally different from Japan in the 1990s. To be sure the Nikkei Index is down 75 percent from its 1990 peak. For sure Japan has been in mild deflation for much of the past decade and may be headed that way again given the recent rise of the yen and the collapse in oil and other imported commodity prices.
But Yosano to the contrary, just look at how Japan has fared compared with countries that were supposedly exemplars, at least until recently. Despite occasional dips into recession and a general lack of dynamism, the Japanese economy has grown modestly for most of the period. And when seen in per capita terms rather than total gross domestic product, its performance has not been especially feeble by the standards of the rest of the major developed countries.
The EU’s statistical organization Eurostat has some interesting data comparing per-capita GDP on a purchasing power parity (PPP) basis between 1998 and 2007. This shows that over the decade the Japanese average fell 6 percent against the EU average. However, most of the gains in the EU were accounted for by fast-growing newcomers from the former Soviet bloc such as Poland and the Czech Republic, and small countries such as Ireland. Over the period Japan’s performance was almost exactly the same as Germany’s and just 2 percent worse than France’s. It was 6 percent worse than the UK’s and 16 percent worse than the front runner of the large countries, Spain, but 10 percent better than Italy’s. Compared with the US, using the same Eurostats data, Japan’s PPP declined by just 2 percent.
The countries which significantly outperformed Japan all did soon the back of borrowed money. The UK and Spain have consistently been running current account deficits of 3 percent or more of GDP, much of the borrowing being used to finance housing price and construction bubbles and excessive consumption. The closest comparison to Japan is Germany, which also consistently ran a large surplus which propped up much of the rest of the Eurozone.
Compared with the US too, Japan looks like roses, achieving only slightly lower per capita growth while accumulating foreign assets while the US was borrowing $2 trillion from foreigners.
Of course there are lots of things wrong with Japan: its aging population, inability to reform its services sector, reliance on exports (now more to China than the US) for growth, and the size of its government debt. But it makes no sense to compare Japan’s deflation era to what is happening in the US. Nor to suggest that US fiscal problems are small compared with Japan where government debt even after netting out intra-government holdings and adjusting calculations to a similar basis to other OECD countries is at least twice the US level.
For a start, Japan’s public debt is owed almost entirely to its own citizens, not to foreigners who expect to be repaid. The debt is as big as it is because Japanese corporations and households have been saving so much, forcing the government to use fiscal deficits to stimulate demand. The US has hitherto been the opposite, with households saving almost nothing and the government in deficit.
The US is going to change. Households are now saving again – but they will have to save hard indeed to fund the deficits now being cranked up supposedly to offset the threat of deflation.
As for the aging issue, it is not yet impinging on the US as it has – and will continue to have – on Japan. For Europe, its coming decade will, in demographic terms, be much like that of Japan in the past decade,with workforces beginning to decline in Germany and Italy. But even for the US with its immigration rate and higher birth rate the aging issue combined with a weak social security system and abominable health coverage is serious enough to demand that households start saving very heavily. If they really do so, expect the US economy in per capita terms to do worse than Japan in the “lost decade”.
In theory that might lead to a stronger dollar as the current account gets back into balance. But having borrowed so much in the past, a weak dollar is clearly in the medium term interests of the US. Savers in the US are also likely to face even low real returns on their holdings of government bonds than they do in Japan.
In contrast to a still quite weak dollar, in Japan’s case, the first part of the post-bubble era was marked by a very strong yen – peaking at 85 to the dollar in 1995 – which added to the deflationary pressures of the asset price bust. Very conservative policy and reluctance to admit the extent of asset prices falls and the extent of losses of the financial sector certainly prolonged the weakness of the economy. But in retrospect it at least ensured that there was no headlong rush to debase the currency.
Thus today the yen has become the world’s one (and only?) major safe haven currency and the value of savings of its aging population has been protected. Yields may seem miserable but for most of the post-bubble period they have remained positive – which is rather more than can be said for US rates over recent years of Greenspanism.